Stocks, euro hit by Greece fears; bonds soar

European officials ended a weekend meeting without agreeing on new ways to tackle the debt crisis. International lenders told Greece on Monday that it must shrink its public sector and improve tax collection to secure a vital 8 billion euro rescue payment next month.

Investors feared the crisis was worsening after Greece's prime minister canceled a US trip to chair an emergency cabinet meeting at home and German Chancellor Angela Merkel suffered a regional election loss.

"The market is bracing itself for the worst possible outcome, which is a disorderly Greek default," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London.

Focus is now shifting to a conference call between Greece and its international lenders at 12 p.m. (1600 GMT) to see how Greece plans to make up its budget shortfall and avoid a disorderly default.

World stocks as measured by the MSCI world equity index fell 2.4 percent on the day, after posting its biggest weekly gain since early July last week.

On Wall Street US stocks fell for the first time in six sessions. The Dow Jones industrial average was down 234.88 points, or 2.04 percent, at 11,274.21. The Standard & Poor's 500 Index was down 25.52 points, or 2.10 percent, at 1,190.49. The Nasdaq Composite Index was down 49.48 points, or 1.89 percent, at 2,572.83.

European stocks lost 2.4 percent, led by sharp losses in the banking sector, while emerging stocks dropped 3.1 percent.

With the gloom so widespread, investors took little comfort from expectations that the Federal Reserve would introduce new measures to stimulate the US economy later this week.

"It's no more a link between markets and economics, but a link between markets and politics. The politicians should have seen the crisis coming and done more, but the problem is they are not proactive," said Koen De Leus, strategist at KBC Securities, in Brussels.

"We are just going from one crisis to another. It's a nightmare for the markets."

SAFE-HAVEN FLOWS

The euro shed 1.4 percent to $1.3611 and traders braced for a move to last week's seven-month low of $1.3495.

Worries about the euro zone prompted investors to piled money into the relative safety of the US dollar. Against a basket of currencies, the dollar rose 1 percent.

The yen also benefited, with the euro down nearly 2 percent and the dollar 0.4 percent lower at 76.44 yen.

While the Swiss franc is typically the beneficiary of safe-haven flows, actions by the Swiss National Bank in recent weeks to weaken it have pushed more of those flows to the dollar.

Investors also sought refuge in US government bonds. The benchmark 10-year US Treasury note was up 28/32, with the yield at 1.9575 percent. Prices of 30-year bonds were up 2-1/32, their yields falling to 3.21 percent.

"Risk is 'off,'" said John Briggs, interest rate strategist at RBS. "This morning reminds us of the price of being short Treasuries in this environment, reinforcing our view that the only position choices remain flat or long," he said.

Strong gains in the US dollar pressured gold prices, which was last trading around 1785.90 a troy ounce, after earlier rising as high as $1,827.36.

Finance ministers of the BRIC emerging economies -- Brazil, Russia, India and China -- will meet this week to discuss support for the euro zone. A Brazilian newspaper said on Monday that the BRICS have already bought debt through the European Financial Stability Facility (EFSF) and could buy more.

Copyright Reuters, 2011